Hungary Central Bank Statement

Author: | Published: 5 Sep 2017

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In the aftermath of the global financial crisis, central
banks took several unconventional steps to stimulate the real
economy. These included using their balance sheets more
actively than before and in some cases their balance sheets
expanded substantially. In the years to come, central bank
balance sheets will be of crucial importance, but there is a
significant debate about their optimal size and the possible
ways and timing of reducing them.

At the time of the global financial crisis, the Hungarian
economy was characterised by an unsustainable debt trajectory
and weak structural growth. As the central bank of a small,
open economy, the Magyar Nemzeti Bank (MNB) needed to find
well-designed, targeted monetary policy tools to stimulate
growth.

To complement the conventional monetary policy tools, the
MNB took unconventional measures that had a direct impact on
economic growth. The Funding for Growth Scheme and more
recently the Market-Based Lending Scheme have set lending to
SMEs on a rising trend. These targeted monetary policy measures
have been supported by the active use of the central bank
balance sheet. Restructuring, rather than expanding, the
central bank balance sheet helped in designing the incentives
of the banking system.

At the same time, other policy tools targeting a decrease in
the economy's vulnerability also had a positive indirect impact
on Hungary's economic growth. The vulnerability stemming from
foreign exchange exposure was decreased greatly via the
conversion of foreign currency loans into Hungarian forint.
Simultaneously, the self-financing programme decreased the
currency and the renewal risk of government debt. Overall,
these measures contributed to a sustained reduction in
vulnerability and restored confidence in Hungarian economic
policy, which was also reflected in upgrades of Hungarian debt
by international rating agencies. Apart from these
achievements, the measures led to a considerable increase in
disposable income by decreasing financing costs for each
economic sector.

As a result, the MNB has contributed significantly to
Hungary's growth rate, returning it to the regional average,
which is among the most dynamic in the EU. The MNB achieved all
of this not by expanding, but by restructuring the central bank
balance sheet. This allows the MNB to influence monetary
conditions and manage excess liquidity more efficiently in
order to achieve price stability. Uniquely, an accommodative
monetary policy environment has been achieved and at the same
time the central bank's balance sheet as a percent of GDP
decreased by one third in the past four years. This contraction
in the central bank balance sheet increases the room for future
policy manoeuvre in case it is necessary.

In the new era following the global crisis, it is important
to maintain a balanced cooperation of policies, as well as a
flexible and innovative approach to promoting sustainable
growth. Targeted country and market-specific actions are
required to boost economic growth by increasing
competitiveness, to decrease vulnerability and to heal impaired
post-crisis transmission channels.